Unicorns or Monsters?

In 1994, just as the Tomorrow’s Company Inquiry was getting into full swing, I undertook a fascinating study tour of Silicon Valley. I met some of the young companies, like Intuit, that were breaking through, and some of the venture capitalists, like Sequoia Capital that were financing them. I learned a lot that I have never forgotten about the importance of having a buccaneering entrepreneurial spirit and a willingness to sacrifice results today for results tomorrow.

Today our lives are steadily more dominated by large companies born in Silicon Valley or its equivalents. These companies persuade private equity companies or billionaire angels to fund them through years of losses and then achieve an Initial Public Offering on the promise that they ‘disrupt’ and corner markets so effectively that they are the giants of tomorrow.

There are now 156 ‘unicorns’ in the USA – companies which are privately owned and which are valued at more than $1billion. 88 of them are in the San Francisco Bay area. Silicon Valley is producing more unicorns and scaling them faster.

The label may have been appropriate when they were new and rare young, but things have changed. ‘Monsters’ may soon be the more accurate description.

As the Economist (Unicorns going to market, April 20th, p24) has put it:

‘Network effects which make the value of the system grow more with each new user the more users it has, mean that the big get bigger while the small stay small, and the quicker you can get bigger the biggerer (sic) you get… ‘blitzscaling’ becomes a paramount goal.’

There is a wall of money ready to be put into the unicorns. That increases the pressure on them to grow sales and show the prospect of shareholder returns. As many as 235 venture capital firms have plans to go public this year. Over 80% of these have not produced any profits. Ten years ago, the proportion was just over 30%.

The Economist asks how they will achieve profits. There are three ways:

The first is to get more customers.

The second is to get existing customers to spend more.

The third is to get higher margins.

To show just how steep their growth curve needs to be The Economist has taken a group of 12 firms and analysed them. It estimates that they will need to increase sales by a compound annual rate of 45% for 10 years, while increasing their margins by 34%!

It is hard to see these unicorns achieving the profitability implied by their valuations unless they achieve a market position so dominant that it is quasi-monopolistic. At the same time the temptation will be to impose social costs so that they can prosper, as companies like Amazon have done in their employment practices.

One solution to this is for unicorns not to list, but to retain large patient investors who are prepared to wait 20 years for their returns.

Another is for investors and entrepreneurs to recognise that the Silicon Valley model of ‘blitzscaling’ is coming an end, and to seek a more patient model of growing businesses which have a better chance of continuing but which do not depend on crushing the markets that they are in.

My suspicions are growing that this whole business model will be looked back on as a sophisticated conspiracy against the public. We all know how Facebooks early idealistic protestations morphed into helping Cambridge Analytica steal data and manipulate elections. Now comes news in The Guardian that Uber and Lyft are cheating their drivers and their customers by covertly raising peak prices and not passing on any of the increase to drivers.

In the Guardian article Maurice Stucke, Professor of Law at the University of Tennessee, has analysed the problem of Uber and Lyft as follows,

‘They can create the rules of the game; they can design the competitive process, and they can ensure whichever driver makes more or less, whoever wins in the competition among drivers, they can be assured they are always going to profit.’

A strengthening of anti – trust law and enforcement in the USA might be one governmental response. Another might be pressure to tax or otherwise strengthen employment and training obligations on for-profit companies which fail to demonstrate their integrity. B Corps would be one way. An extension of The Trust Test would be another.

In one way or another it is only a matter of time before society calls time on this business model. Its focus on relentless scale and growth is becoming incompatible with the needs of a sustainable economy. The public frustration with a system, under globalisation, where they feel they have no control, is only likely to grow.

The search is on for new business forms that can, at scale, do justice to agility and innovation without destroying social capital. They would indeed deserve to be called unicorns.